China grapples with natural-gas shortage

HuangKaixi

BEIJING (Caixin Online) — Winter has only just started, and China’s is experiencing its biggest natural-gas shortage ever.

At a shareholder’s meeting in May, the chairman of China National Petroleum Co. (CNPC), Zhou Jiping, announced that “resources are extremely tight this year.”

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The company supplies nearly 70% of China’s natural gas. Zhou said CNPC plans to supply 107 billion cubic meters of natural gas this year, 8 billion short of expected demand. Some research institutions predict the country’s shortfall will hit 10 billion cubic meters.

Seasonal factors and sustained smog have both played a role in the shortage. A CNPC manager said that a great deal of the pressure to guarantee gas supplies came from state-level orders linked to energy restructuring, which stem largely from air pollution. In northern China, which is bedeviled by bad air, officials are trying to end large-scale use of coal for heating and power generation.

The country’s domestic supply of natural gas cannot meet demand. Last year, the country had 3.1 trillion cubic meters of verified gas reserves, just 1.7% of the global total. Meanwhile, China’s demand was 143.8 billion cubic meters, of which 40 billion had to be imported. It is estimated that China’s dependence on imported natural gas will exceed 35% by 2015.

Urbanites are gradually becoming accustomed to using natural gas. So are electricity companies and manufacturers. The vice director of the National Reform and Development Commission (NDRC), Lian Weiliang, has said that consumption of natural gas in the first three quarters of 2013 had grown by 13.5% compared to the same period last year, much faster than the 9.2% growth of production.

Feeling the pinch

The great difficulty in developing domestic natural-gas reserves, the slow pace of negotiations for importing natural gas, and inadequate transportation and storage infrastructure have all contributed to the widening gap between supply and demand. Considering the need to meet winter heating needs, industry may face cuts.

From Oct. 14 to Nov. 4, the NDRC issued three notices on meeting this winter’s gas needs. On the upstream level, it imposed hard targets on production, demanding that major fields to produce at maximum capacity. The country’s top economic planner also urged oil companies to add to production capacity.

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In Beijing, both total gas consumption and daily average use at peak hours surged in 2012. Total consumption in the capital on the year was 9.2 billion cubic meters, year-on-year growth of about 1.6 billion cubic meters. Most of that growth was attributable to heating, which accounted for 6.8 billion cubic meters of consumption, year-on-year growth of 800 million cubic meters. Daily peak consumption was 64.4 million cubic meters, year-on-year growth of 12.7 million cubic meters, or 24%.

Natural gas is the mainstay of Cangzhou Dahua Co., which makes chemical fertilizers and other products in Cangshan, Hebei Province. On Nov. 12, company officials announced that the CNPC was temporarily suspending provision of natural gas to the company as northern China was entering the heating season and residential use of natural gas was rising. Without access to natural gas, and with product prices decreasing, Dahua’s net profits fell 32.7% year-on-year during the first three quarters of the year.

Away from coal

The director of the Strategic Research Center at the China Institute of Energy Economics, Chen Liuqin, said that the reasons behind gas shortages are similar year to year, but the reason the problem was so much worse this year is pressure to reduce pollution and substitute gas for coal.

The Atmospheric Pollution Prevention Action Plan issued in September by the State Council, the country’s cabinet, demands that by 2017 coal account for 65% or less of national power generation; that the regions of Beijing-Tianjin-Hebei, the Yangtze River Delta and the Pearl River Delta strive to bring about reduced coal consumption; that those regions forbid the building of new coal-burning power plants; and that coal reduction substitution be implemented in existing coal-burning projects. The plan also forbids the building of any new coal-burning power plants.

The efforts to reduce coal usage in the Beijing-Tianjin-Hebei region are unprecedented. Targets set by the Beijing and Hebei governments require that by 2017, the capital’s total coal consumption be 130 million tons less than in 2012; that coal account for 10% or less of total resource consumption in the capital; that 90% or more of Beijing’s energy consumption be of high-grade energy; and that Hebei’s total coal consumption be 400 million tons less than in 2012. The Tianjin bureau of the NDRC has demanded that coal consumption in Tianjin be 100 million tons less than in 2012.

Beijing consumed a total of 230 million tons of coal last year, which accounted for 25% of total energy consumption. Natural gas will have to play an important role in restructuring if central government targets are to be met.

On Aug. 25, the Beijing Environmental Protection Bureau issued guidelines demanding that 137 boilers of about 4,900 tons of steam capacity in six urban districts switch from coal to gas, from this year to 2015, thus reducing coal consumption by 1.2 million tons. Nearly all industrial and corporate boilers in the entire city were told to switch from coal to gas by 2016.

But changing energy habits is no easy task in a country with abundant coal reserves but scant oil and gas endowments.

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According to Zhou, CNPC’s natural-gas supply capacity has grown 10% to 13% annually, and as of the beginning of the latest five-year plan, his company has invested about 150 billion yuan ($24.6 billion) annually in natural gas, half of that in exploration and the other half in safeguarding supply. “But we need time,” he said.

It takes four to five years after beginning exploration and development to convert untapped resources into supply capacity. Two to three years are required to build pipelines, and even more time is needed to import natural gas from other countries. “At present, demand growth is still outpacing supply growth.”

Zhou said that the Central Asia-China pipeline from Kazakhstan will add about 25 billion cubic meters of supply capacity by the time it is completed late next year. Add that to new reserves and production capacity coming online in the southwestern province of Sichuan and in Qinghai, in the northwest, and resource formation worries should be mitigated, said Zhou.

Buffer building

Since the Changbei Gas Project, a joint venture between CNPC and Shell
RDSB, -0.50%
,
RDS.B, -0.37%
began commercial production in 2008, its annual total of 3.3 million cubic meters of natural gas passing through the Shaanxi-Beijing Line 2 into Beijing and surrounding regions accounts for about 40% of the capital’s natural-gas consumption.

Xu Li, project manager of the Changbei Project, said evaluations for the next phase have been launched, and geological and exploration assessment work is expected to be completed by the beginning of next year.

Ji Xiaonan, of the State-owned Assets Supervision and Administration Commission, said that more diverse supply channels are an absolute necessity, but it is not possible in the short term. Thus, the country needs to strengthen clean-burning coal efficiency.

Natural-gas shortages are a long-term issue, said Ji, and as such it is vitally important to coordinate upstream resource development and downstream construction of storage and transportation infrastructure.

The research director of commodity market information and service provider CBI Group, Yu Qing, said that under the central government’s guidance, local governments have pushed out gasification regulations and such projects have seen a surge across the country. But due to inadequate coordination and planning, demand for natural gas has skyrocketed, exacerbating the supply-demand imbalance.

Meanwhile, negotiations for the import of natural gas remain sluggish due to price issues. In 2012, CNPC suffered losses of about 41.9 billion yuan in the sale of natural gas and liquefied natural gas imported through pipelines. An industry insider has said that even if one accounts for natural-gas price increases in the short term, CNPC will still lose over 50 billion yuan on imported gas this year.

Unlike crude oil, which is easy to store, natural gas requires simultaneous coordination between producers and consumers. Yu said even countries with mature natural-gas industries experience difficulties with highs and lows in demand. Buffer areas with gas storage are required to store excess gas during periods of high production to offset shortages during peak demand periods.

Nevertheless, construction of China’s gas-storage infrastructure is severely behind, with nationwide working gas-storage capacity of only 2% of annual consumption, a far cry from the global average of 12%.

“Daily consumption of gas in the winter in Beijing will be eight times greater than in the summer, but the development of China’s gas-storage facilities has only just begun,” Yu said. “At present there are still not enough storage facilities to buffer for the peaks and troughs.”

Officials in the National Energy Administration (NEA) are aware of this problem. In a recent plan they established the following targets for the development of gas-storage facilities by 2015: adding 22 billion cubic meters in new working gas storage capacity and increasing total investments in gas storage to over 80 billion yuan. The storage target for northern China is about 3 billion cubic meters, and 10 billion cubic meters for the major gas producers Xinjiang and Shaanxi, both in the northwest.

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